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Our new leadership elected to sell our position in Valeant Pharmaceuticals, exiting completely by mid-June. Valeant was our largest position to start the year and its 80% decline through June 30 badly penalized our results. – Sequoia Fund Shareholder Letter

Sequoia Fund management’s decision to finally exit their stake in Valeant Pharmaceuticals ends a painful almost year long slide in their biggest position and what was at one time their best performing holding.

Sequoia was an early investor in the Mike Pearson era Valeant. A strong believer in what they saw as a savvy manager who took a value approach to buying healthcare assets and wringing efficiency from them. Sequoia started purchasing Valeant in early 2010, probably at prices in the mid teens, and by the end of the year the position accounted for 10% of the funds assets. At year end they already had a gain of 78%. A fantastic return on investment in less than one year and a big boost to the fund’s performance.

The fund managers continued to build a position over the next five years and were enjoying the outperformance the stock added to the fund’s returns. By 2015 the position reached 20% of the fund’s assets and Sequoia also became Valeant’s single largest shareholder.

Then in August of 2015 the position began to lose money. You can’t fault the fund managers for sitting on the position while the stock declined in August along with the rest of the global markets. Continue reading →

Advice from an 80 year old billionaire with businesses that span across many different industries, from old line manufacturing to high tech. One of the pearls of wisdom he cites is an important factor in sizing up investments and operating businesses, cash flow is king.

“I’m always very careful with my cash flow. That will ensure I have extra capital to get into another industry whenever I want to.”

Forget gross merchandise volume, return on equity or debt-to-equity ratios. The most important metric in business is cash flow, according to Li. The tycoon says he’s been keeping an eye out on cash flow since he became an entrepreneur more than six decades ago. One needs to generate good cash flow before expanding into other industries and to store up some insurance for a rainy day, he said.

So often in the investment business, we look for answers in quantitative models. Systemic risk is 19.2 — time to hedge! Systemic risk has fallen to 7.9 . . . Phew, we can all breathe easier now! Alas, if only it was so simple. There is a quote, often and perhaps erroneously attributed to Albert Einstein, “Not everything that can be counted counts, and not everything that counts can be counted.” Apocryphal or not, it’s true in all walks of life and certainly true in evaluating systemic risk.

Like this:

2015 was another dismal year for commodities, the third year in a row of negative returns. Over supply continues to be the universal theme in the market, however capacity cuts are beginning to be announced. As the saying goes the cure for low prices are low prices.

The real curse for commodity prices, however, is on the supply side. The last decade’s commodities boom has led to irrational investment in new projects. China’s demand for iron ore and coal declined only this year, but commodity prices have been dropping since 2011. These price declines reflect concerns about a persistent surplus as mining firms continue to expand supply. Global iron ore production is expected to have increased by 100 million tons in 2015 despite the declining demand from China, and further increases are expected over the next two years.

Recently I was listening to an interview with Jeff Gundlach, the CEO and CIO of Doubleline Capital, where he was talking about the liquidity of commercial mortgage backed securities (a type of bond that is backed by mortgages on commercial buildings) and he used that phrase to describe the market in those securities. Until you have actually been in a position that you can’t get out of at a reasonable price you would never understand how true that statement is. Unfortunately in the last week, many high yield bond investors and managers at Third Avenue Focused Credit Fund are finding out how price and liquidity can disappear just when you need it most. (Third Avenue Blocks Redemptions From Credit Fund Amid Losses)

I love clichés. The thing about clichés is that they wouldn’t be around and so heavily used if they weren’t true. In this case, there is a hard lesson to learn. One that can go without notice until you are right smack in the middle of it and wishing there was a way out.

Investors have been looking for income from alternatives to low yielding bonds since the Federal Reserve lowered the interest rates to zero after the 2008 financial crisis. This search for income in a low interest rate environment has led to a huge inflow of investment into master limited partnerships and high yield bonds over the last few years. According to the Wall Street Journal, from 2010 to 2014 a net $44 billion flowed into MLP mutual funds and exchange-traded funds. Lured by yields of 6% plus at a time where the 10 year treasury bond yields 2 percent, investors have been forced into assets that carry far more risk.